Friday, February 29, 2008

Dean Foods’ New Slogan: “It Seemed Like a Good Idea at the Time”

The poster child of the perils of following Wall Street’s whims must certainly be Dean Foods, the low-margin Dallas-based dairy company that almost one year ago to this day proudly “returned value to shareholders” through a special one-time, $2 billion dividend, just before commodity inflation was to rip the guts out of Dean Foods’ cost structure.

Its share price was north of $45 at the time.

Last night the same company did a spot secondary of 18.7 million shares in order to help pay the debt incurred in funding that special dividend, at a price just south of $20 a share.

Most galling to shareholders must certainly be that last night's sale price is just a few bucks more than the $15 a share special dividend that destroyed the commodity processor’s financial flexibility to begin with.

For those who would defend the investment bankers who came up with the goofy scheme of loading a commodity processor with debt just for the heck of it—not to mention the fees—and the Board of Directors that approved the goofy scheme mainly to feel good about themselves for a few months, we say study the history of Dean Foods’ primary cost inputs and ask yourself if a low-margin, highly volatile business model justified anything more than a modest, regular dividend to patient shareholders.

Rather than re-hash the gory circumstances surrounding this travesty of corporate chest-thumping, investment banker hubris and short-term herd-following, we republish for the record accounts of both actions, on the theory that those who know their history may be less inclined to repeat it.

March 2, 2007

Dean Foods Announces Plan to Return Approximately $2.0 Billion to Shareholders Through Special Cash Dividend of $15.00 Per Share

DALLAS, March 2, 2007 /PRNewswire-FirstCall via COMTEX News Network/ -- Dean Foods Company (NYSE: DF) today announced plans to return $15.00 per share to shareholders through a one-time special cash dividend totaling approximately $2 billion. The special dividend will be financed by a recapitalization of the Company's balance sheet through $4.8 billion in new senior secured credit facilities.

"Dean Foods is an organization with strong momentum as reflected in our 2006 results and positive outlook for 2007," said Gregg Engles, Chairman and Chief Executive Officer. "Over the past several years we've consolidated the industry and developed a leading market position through significant strategic acquisitions and investments in building out our branded portfolio. With this platform in place, we are now entering the next phase of our evolution. Over the next few years, we will be focused primarily on leveraging our scale to drive internal growth through maximizing productivity and efficiencies across our business."

Engles continued, "Given our internal focus, our strong cash flows, and the incredible liquidity and flexibility of today's debt capital markets, the appropriate finance decision for Dean Foods today is to increase our exposure to the debt markets and return equity capital to shareholders, while enabling them to continue to participate in the Company's future performance and growth."

Dallas-based Dean Foods Co. said Thursday it will issue 18.7 million shares of stock, in part to pay debt from a dividend it gave shareholders last year.

The new stock offering, being underwritten by Lehman Brothers, will help bring the nation's largest dairy producer closer to the debt repayment schedule it planned on when it issued the dividend last spring, the company said in a filing with the Securities and Exchange Commission.

"The operating environment in 2007 was extremely difficult, and operating results were below the expectations" Dean had when it issued the dividend, the company said in the SEC filing."As a result, the company entered 2008 approximately a year behind its original debt reduction expectations."

9 comments:

I like how Eagles was more than happy to put in a long and humble quote when the dividend was announced, but had nothing to say to shareholders when the company was falling into the hands of their creditors.

Just to be fair, though, I don't think anyone, even the CFO at DF, could have anticipated the topsy-turvy conditions in credit markets from the time the special dvidend was paid until now. Also, I don't think anyone could have predicted the sky-high rise in commmodity prices that food processors like Dean have seen in decades.

Don't get me wrong, though - I'm in your camp that leveraging the balance sheet with debt to pay a dividend, special or not, is just plain foolish especially when operating cash flows are spotty and challenged by both the operating environment (i.e., higher commodity costs) and the credit market (for their senior secured facilities).

Every CEO of a public company should keep a copy of this story in their desk drawer and read it anytime a Wall Street type (i.e. I-Banker, fund manager or analyst) calls to suggest/demand a debt financed special dividend or stock buyback. And while Dean Foods isn't alone in this act, it deserves a special award for coming full circle in less than twelve months

Ok, Ok...so the leverage game didn't work...maybe Dean should get into...trading broadband capacity to make up for their shortfall!? That would SURELY give them a competitive advantage versus the rest of those bumbling dairy processors!

Oh, and George...can't Dean at least keep Mr. Engles as a CEO Emeritus?

One of the problems with the investment bank/LBO/private equity business model of Wall Street is that if a target company like Dean Foods doesn't load itself up with debt (when money is freely available, such as during 2005-mid 2007), then some private equity outfit will take them over and do it for them --- while paying themselves the "one-time dividend" PLUS deal fees, "advisory" fees, etc. etc. It is a huge rip-off, typically leaving the target company weakened, unable to properly deal with changing economic/industry circumstances, etc. Furthermore, critical factors such as research, business development, human resource enhancement, etc. are typically cut to the bone, with severe consequences for the future profitability and growth of the target company.

Without my defending Dean Foods management for their "stupidity" in "returning value to shareholders" in the manner they did, they were probably told by investment bankers that if they did not follow that course, they could expect a hostile takeover by private equity and get raped twice over that way instead. For proof of that threat, just look at the private equity takeover frenzy of 2005-mid2007, when the big banks were throwing free and "cov-light" money at PE. In March 2007 Henry Kravis stated that PE was in a "Golden Age". The above shows why.